Get with the Plan: August 31, 2014

David, 57, and Robin, 44, want to share their retirement in a warm place, doing volunteer activities and traveling. But they face financial challenges because David is 13 years older than his wife.

“Once he retires we plan to move south but we both may continue working and/or volunteering our time,” Robin says. “If one of us outlives the other, we want to make sure that the surviving spouse will have adequate assets for the duration of their life.”

The childless couple, whose names have been changed, have saved $186,000 in 401(k) plans, $30,000 in a brokerage account, $51,000 in Certificates of Deposit, $14,000 in a money market account, $6,000 in savings and $13,000 in checking.

David is also eligible for two different pensions at age 65. The first will be worth $1,400 a month at age 65, and the bigger one will be worth $4,355 a month at age 62 or $4,668 at 65 — and that’s the amount for a survivor pension, so payments would continue for Robin after David dies.

The Star-Ledger asked Jody D’Agostini, a certified financial planner with AXA Advisors/The Falcon Financial Group in Morristown, to help the couple come up with a long-term game plan.

While moving south will probably mean for them a lower cost of living, D’Agostini still inflated their expenses by 3 percent a year to see if they’re on target for retirement.

A big potential challenge is that David is 13 years older than Robin. Because he hopes to retire at age 65, Robin will be forfeiting some earning potential by retiring at the age of 52, she says.

The good news is that David’s pensions are sizable, and they will continue for Robin should he predecease her. Then, they will also have Social Security benefits.
D’Agostini calculates their monthly expenses to be $5,967 per month. With inflation, she says this should be approximately $7,559 per month when they retire, leaving a shortfall of $1,804 per month. Based upon these assumptions, the pensions will pay 76 percent of these expenses, she says.

Because David has the higher Social Security benefit at $2,643 per month at his full retirement age 66 and 6 months, compared to Robin’s $2,153 per month at age 67, D’Agostini says it makes sense to delay the claiming of his Social Security benefit for as long as possible.

“If you claim at age 62, the earliest time for claiming you will cut your benefit to 75 percent of the full retirement amount, but if you wait until age 70, the latest age you will get 132 percent of the full amount,” she says. “This could make a difference, because this is the only guaranteed income that they have with a cost of living adjustment going forward.”

And because the couple has said they expect to continue some part-time employment in retirement, they should easily close the gap on this discrepancy, allowing both Social Security benefits to trend upwards.

But they should also consider their general health and family longevity before making any decisions.

“If your parents lived a long life, and you are in relatively good health, then it might make sense to defer as long as possible,” she says. If you don’t expect a long lifespan, it makes sense to take the benefit early, otherwise wait.

All that said, D’Agostini says they are on track for David to retire at age 65.
And they could do one better. D’Agostini says they could actually afford to retire at David’s age 63.

“The longer that they stay in the work force though, the more certain their future will be,” she says. “The great unknown in retirement, and therefore the greatest risk, is longevity.”

One of the fastest growing segments of the population is centurions, and with that goes the added medical expenses that go on as we age, she says, and medical expenses become a larger portion of the overall budget.

For that reason, she recommends they consider long-term care insurance

“Their future looks secure, but not if they have to provide the same expenses, plus the additional burden of long-term care costs which now average $3,450 per month for assisted living, and $74,520 per year for nursing home care nationally,” she says. “”One or the other spouse would not have the ability to take on both expenses.“

Looking at their investments, D’Agostini says it appears they are taking on less risk than their risk tolerance suggests. They still have eight years until David turns 65, which allows them some time for their assets to potentially grow. This could help make the difference in having sufficient assets to allow them to defer their Social Security benefits for as long as possible, she says.

“They came out as having a moderate risk tolerance per a risk tolerance questionnaire, but yet they have a more conservative asset allocation with 28 percent of their portfolio in cash or cash equivalents,” she says.

With the current climate, these assets are not keeping pace with inflation, and therefore over one-quarter of their portfolio is not giving them future purchasing power, D’Agostini says. She recommends rebalancing their portfolio to mirror the asset allocation for a moderate portfolio, which would hopefully achieve the desired higher return.

Also, their portfolio is not well diversified with only four asset classes, she says.
“A well-diversified portfolio can help maximize your returns and reduce the overall risk,” she says. “At a point closer to their retirement, it is good practice to revisit the risk in the portfolio and the asset allocation so that they do not take on any more risk than necessary to achieve their goals.”

Get With the Plan is designed to illuminate personal finance concepts and isn’t a substitute for actual financial planning or dedicated professional advice. To participate, contact Karin Price Mueller at kmueller@starledger.com.